HPCL, ONGC Merger Would Not Bring Synergy: Ambit Capital

Acquisition of government stake in HPCLby ONGC wouldn’t bring much synergy benefits to the two companies but would, instead, result in the weakening of high-performance culture at the target company, Ambit Capital has said in a report.

“ONGC parentage could mean interference (from ONGC or government), highly probable participation in upstream and, more importantly, dilution of a high-performance culture,” analysts Ritesh Gupta and Gaurav Khandelwal wrote in a note on Tuesday.

“We believe long-term holders should get concerned as the deal gets closed and HPCL becomes a subsidiary to ONGC, which doesn’t have such a good track record on capital allocation,” the analysts wrote, wondering how HPCL can gain by becoming a unit of ONGC in an era where oil subsidies have vanished and crude prices are unlikely to cross $60/barrel in a hurry.

The transaction would most likely happen at close to the current market price, and not at a premium, in the same way as other divestment deals by the government in the past few years have happened, the report said.

“We believe that the government would not like to show itself in a bad light before ONGC’s minority shareholders,” the analysts wrote.

“An open offer or substantial premium for HPCL is unlikely by ONGC; during government stake sale, SEBI laws allow avoidance of open offer if ultimate ownership remains the same and premium paid is less than 25 per cent,” they wrote.

At current prices, the government stake in HPCL would cost ONGC about $4.5 billion and would raise the acquirer’s debt-equity ratio to 0.4 from 0.2 now, according to the report.